by Christopher Bungay, Divorce Lawyer
In many divorces, one spouse is the owner/operator of a business. In these families, the line between business income and personal income is often blurred. Many business owners (intentionally or not) often use their company credit cards and corporate money to pay for personal family and home expenses. As a result of this, the personal tax returns of a business owner often do not reflect their true personal income.
In the above scenario, the personal tax return of a business owner might show a very low amount of personal income, while their business tax return can show a very high amount of corporate earnings. It is also common to see personal expenses counted as “business expenses” on business tax returns. This is sometimes done intentionally so that CRA will think the business earns less and thus would be taxed less than it otherwise should be.
The mixing of personal/business income and expenses can cause significant problems in divorce cases. The amount a spouse must pay for child support and spousal support
is often based on his or her reported personal income. A spouse who owns a business sometimes uses a false lower income amount on a personal tax return to argue they should pay a lower amount of support. Unfortunately, in many cases, the actual personal earnings power of the spouse is hidden within the business income.
Judges and divorce lawyers are keenly aware of situations where business owners try to muddle their personal and business income. Fortunately, the law can protect vulnerable spouses and children in these cases. If a judge believes that a spouse is hiding income within a company, the business income can be used as the correct amount for determining support payments. Similarly, the law gives judges power to examine business expenses to ensure these are not actually personal expenses. In an Alberta divorce case, if a spouse is self-employed, he or she must demonstrate their business expenses are reasonable and that they are truly business expenses. If a self-employed spouse cannot show their business expenses are reasonable, a judge can add these expenses back into the spouse’s income amount. In these situations, the higher income level, after adding back in the unreasonable expenses, is used to determine that spouse’s support obligations.
It is also important to remember that many business owning spouses are not intentionally hiding their income. The mixing of personal and business income can result from someone not understanding tax laws. Sometimes, a business owner is just too busy and is not paying enough attention to their personal/business spending patterns. However, whether intentional or not, divorce law is clear: business income and business expenses can both be used to determine the true personal earning power of a spouse.
